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Two joint products A and B are produced in a process. Data for the process for the last period are as follows:
Product A B
Tonnes Tonnes
Sales 480 320
Production 600 400Common production costs in the period were $12,000. There was no opening inventory. Both products had a gross profit margin of 40%. Common production costs were apportioned on a physical basis.
What was the gross profit for product A in the period?
A $2,304
B $2,880
C $3,840
D $4,800The correct answer is C.
To get the correct answer candidates had to negotiate three steps:
(i) calculate the amount of cost apportioned to product A ($12,000 x 600/(600 + 400) = $7,200)
(ii) then calculate how much of this cost is to be charged against A’s sales in the period ($7,200 x 480/600 = $5,760)
(iii) then calculate the gross profit earned using the gross profit margin given ($5,760 x 40/60 = $3,840).
Could you explain the step iii of the explanation, please? The 40% should be coming from the $5760, no? Or It’s 40% considering both products together?
The 40% is the gross profit margin, which means that the profit is 40% of the sales revenue.
So….for every $100 sales, the profit will be $40 and therefore the cost will be $60.
Or, to put it the other way round, for every $60 cost the profit will be $40.
Here the cost is $5760 and so the profit will be 40/60 x the cost of 5760.
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